China vows to increase yuan flexibility

China will continue to make the yuan more flexible to better reflect market forces and diversify investment of the country's vast foreign reserves, the foreign exchange regulator said on Thursday. "We will improve the foreign exchange rate system based on market supply and demand, and steadily increase the flexibility of the yuan exchange rate," the State Administrative of Foreign Exchange (SAFE) said in its annual report for 2010.
Chinese officials have long pledged to forge ahead with market-based reforms of the yuan regime, but they have ruled out another one-off revaluation. The country was on track for another solid international payments surplus this year, the regulator said.
"China's international payments would still show a relatively big surplus this year although there may be some volatility in external payments," it said. China notched up a $305.4 billion current account surplus last year - equivalent to nearly 5 percent of gross domestic product. Capital account surplus was $226 billion last year.
The regulator also warned that capital inflows to the country may rise if China continued to push up interest rates. "The difference between domestic interest rates and foreign exchange rates as well as relatively low financing costs will attract net capital inflows through carry trades," it said.
The regulator reiterated Beijing's long-standing policy of steadily diversifying the country's foreign exchange reserves, which have topped $3 trillion, to ward off potential risks. "We will continue the strategy of diversifying foreign exchange reserve investments in 2011 and optimise the currency and asset portfolios." China has never published its holdings of US Treasuries, but some economists have said as much as 70 percent of the country's foreign exchange reserves, which hit a record $3.05 trillion at the end of March, are parked in dollar assets. China has been trying to diversify its reserves, the world's largest, away from the US dollar, but analysts say such diversification has been gradual.